stream of consciousness on markets

An investor i know well sent me this presentation from Marc Suster with a note that said “Marc is certain that we’re in a bubble”…i opened it, inclined to be persuaded, as i’m a cautious and anxious soul…but when i really processed it, this bizarre rant came out in response. No idea if it’s right or if there are major fallacies in this logic, but figure better shared than buried:

Response (you really do have to flip through that Suster deck for 2 mins for this to make sense):

i guess a key question to ask is whether this will end poorly for companies or traditional vcs, or both?

the argument that $ coming from “non-traditional vcs” is the cause of private valuations exploding could mean A) they are going to leave and when they do market will contract) or B) although these capital sources were indicative of a coming crash first time around, their presence today might represent the exact opposite…that is that our industry has matured to the point where it is attractive and normal course of business for more risk averse capital sources because our industry is not as risky as it was back then. In that case, there is an argument for sustained growth and further influx of capital into our ecosystem from these sources which would make “being a traditional vc who demands lower prices” a difficult spot to be in: the “ends poorly for traditional vcs but not companies.” case.

The thing that exists independent of whether these capital sources are here to stay or fleeting is a coming reconciliation between public and late stage private multiples, but it is not a forgone conclusion that this ends with private multiples contracting…it could end with public multiples expanding…and this would be the “surprise case” driven by the world waking up a change in risk profile for technology companies, and a larger volume of public market dollars from not the initial chasers (T. Rowe, Fidelity), but the “meat of the institutional market” (mutual funds, index funds, conservative asset managers etc.) deciding that they need to rebalance their portfolios to view tech as more of a meat and potatoes allocation than they previously would have…this could drive public market multiples higher…further, i’d presume part of the decline in public market tech $ inflows (if that is a factor driving multiple compression) is resultant from allocations by more aggressive public market tech investors into private alternatives to what’s being traded publicly. I think surprise case in the public markets is the Andreessen opinion tied to actual market dynamics, and I think the private multiples contracting when reconciled with public market multiples is the Bill Gurley (and i guess marc suster) case…

I’m inclined to not care personally…as i think our world, like most markets, is most certainly cyclical…independent of any specific rationale for when and why corrections and periods of growth occur, and through cycles i see more growth than decline (which gives me confidence to participate on a long term and sustaining basis)…on a short term basis, i could see a stiff correction before the data truly comes in that the optimistic case was in fact correct…and i believe it’s uncertain but likely that it is…the end result of the optimistic case is that technology as a defined industry and asset allocation may contract, but startups and technology companies will be reclassified into market segments by the actual industry that they participate in as opposed to by the fact that they leverage software or sensors…and therefore the true aggregate market, addressable capital and multiples available to them in the public market will exceed the “tech dollars and tech multiples” constraint that we currently contemplate. It’s why looking at “SAAS multiple compression” is not a realist bellweather for the broader coming correction…the thin sliver of “selling software” is and should follow our traditional definition of our industry and market segment, but many of the 80 “billion dollar startups” referenced in this presentation can not and should not be classified as such and constrained to previously held market conceptions of their upper bounds from a public investor demand standpoint. I know someone will say “well if we reclassify tech companies by more traditional, less risky market segments, that should likely lead to multiple compression as tech companies command premium multiples from relative to more meat and potatoes segments…to which i would reply…i’m not a public market investor…i’m winging this, but something about access to different dollars, ability to reinvest capital from these pools into further innovation, etc., etc…i can think out that far, but our industry taking market share in the capital markets, independent of short term multiple fluctuation should end well”

whew…having spit that out, i’m going to say it’s probably 10% wrong…little bit of a rant, but maybe right…gonna publish this thought and see what others think 🙂